Your very welcome Bobcor.
In your effort to piece together Britain's situation in the 1920's and early 1930's, I pulled together a bit more from Quigley. Note particularly (i) the problems that asset deflation played in triggering financial crisis, and (ii) policy issues with respect to trade, unemployment, and exchange values. Britain's behavior in the 1920's from the vantage point of fiscal responsibility is exceptional compared to the U.S. of today. OTOH, according to Quigley, Great Britain was effectively in depression from the beginning of the 1920's until the mid-1930's. So an important question I suppose is whether the U.S.'s easy money policy to stave off deflation has been inspired policy, or whether it has created an even bigger monster from the vantage point of a debt and credit pyramid (i.e. Minsky's "ponzi finance")?
Anyway, here's Quigley:
Great Britain in the 1920’s & early 1930's
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The Period of Stabilization, 1922-1930
… In Britain, stabilization was reached by orthodox paths – that is, taxations as a cure for public debts and deflation as a cure for inflation. These cures were believed necessary in order to go back to the old gold parity. Since Britain did not have an adequate supply of gold, the policy of deflation had to be pushed ruthlessly in order to reduce the volume of money in circulation to a quantity small enough to be superimposed on the small base of available gold at the old ratios. At the same time, the policy was intended to drive British prices down to the level of world prices. The currency notes which had been used to supplement bank notes were retired, and credit was curtailed by raising the discount rate to panic level. The results were horrible. Business activity fell drastically, and unemployment rose to well over a million and a half. The drastic fall in prices (from 307 in 1920 to 197 in 1921) made production unprofitable unless costs were driven down even faster. This could not be achieved because labor unions were determined that the burden of the deflationary policy should not be pushed onto them by forcing down wages. The outcome was a great wave of strikes and industrial unrest.
The British government could measure the success of their deflation only by comparing their price level with world price levels. This was done by means of the exchange ratio between the pound and the dollar. … the pound rose to $4.86, while the British price level had not yet fallen to the American price level, but the Chancellor of the Exchequer, Winston Churchill, judging the price level by the exchange rate, believed that it had and went back on the gold standard at that point. As a result, sterling was overvalued and Britain found itself economically isolated on a price plateau above the world market on which she was economically dependent. These higher British prices served to increase imports, decrease exports, and encourage an outflow of gold which made gold reserves dangerously low. To maintain the gold reserve at all, it was necessary to keep the discount rate at a level so high (4 ½ percent or more) that business activity was discouraged. The only solution which the British government could see to this situation was continued deflation. This effort to drive down prices failed because the unions were able to prevent the drastic cutting of costs (chiefly wages) necessary to permit profitable production on such a deflationary market. Nor could the alternative method of deflation – by heavy taxation – be imposed to the necessary degree on the upper classes who were in control of the government. The showdown on the deflationary policy cam in the General Strike of 1926. The unions lost the strike, that is, they could not prevent the policy of deflation – but they made it impossible for the government to continue the reduction of costs to the extent necessary to restore business profits and the export trade.
As a result of this financial policy, Britain found herself faced with deflation and depression for the whole period 1920-1933. These effects were drastic in 1920-22, moderate in 1922-1929, and drastic again in 1929-1933. The wholesale price index (1913=100) fell from 307 in 1920 to 197 in 1921, then declined slowly to 137 in 1928. Then it fell rapidly to 120 in 1929 and 90 in 1933. The number of unemployed averaged about 1 2/3 millions for each of the thirteen years of 1921-1932 and reached 3 million in 1931. At the same time, the inadequacy of the British gold reserve during most of the period placed Britain in financial subjection to France (which had a plentiful supply of gold because of her different financial policy). This subjection served to balance the political subjection of France to Britain arising from French insecurity, and ended only with Britain’s abandonment of the gold standard in 1931.
Britain was the only important European country which reached stabilization through deflation. East of her, a second group of countries, including Belgium, France, and Italy, reached stabilization through devaluation. This was a far better method. It was adopted, however, not because of superior intelligence but because of financial weakness. In those countries, the burden of war-damage reconstruction made it impossible to balance a budget, and this made deflation difficult.
A third group of countries reached stabilization through reconstruction. These were the countries in which the old monetary unit had been wiped out and had to be replaced by a new monetary unit. Among these were Austria, Hungary, Germany, and Russia.
The Crisis of 1931
It was this shrinkage [of real wealth caused by the Crash of 1929 on Wall Street] which carried the economic crisis into the stage of financial and banking crisis and beyond these to the stage of political crisis. As values declined, production fell rapidly; banks found it increasingly difficult to meet the demands upon their reserves; these demands increased with the decline in confidence; governments found that their tax receipts fell so rapidly that budgets became unbalanced in spite of every effort to prevent it.
The financial and banking crisis began in central Europe early in 1931, reached London by the end of that year, spread to the United States and France in 1932, bringing the United States to the acute stage in 1933, and France in 1934.
The acute stage began early in 1931 in central Europe where the deflationary crisis was producing drastic results. Unable to balance its budget or obtain adequate foreign loans, Germany was unable to meet her reparation obligations. At this critical moment, as we have seen, the largest bank in Austria collapsed because of its inability to liquidate its assets at sufficiently high prices and with enough speed to meet the claims being presented to it. The Austrian debacle soon spread the banking panic to Germany. The Hoover Moratorium on reparations relieved the pressure on Germany in the middle of 1931, but not enough to permit any real financial recovery. Millions of short-term credits lent from London were tied up in frozen accounts in Germany. As a result, in the summer of 1931, the uneasiness spread to London.
The pound sterling was very vulnerable. There were five principal reasons: (i) the pound was overvalued; (ii) costs of production in Britain were much more rigid than prices; (iii) gold reserves were precariously small, (iv) the burden of public debt was too great in a deflationary atmosphere; (v) there were greater liabilities than assets in short-term international holdings in London (about 407 million pounds to 153 million pounds). This last fact was revealed by the publication of the Macmillan Report in June 1931, right at the middle of the crisis in central Europe where most of the short-term assets were frozen. The bank rate was raised from 2 ½ percent to 4 ½ percent to encourage capital to stay in Britain. 130 million pounds in credits was obtained from France and the United States in July and August to fight the depreciation of the pound by throwing more dollars and francs into the market. To restore confidence among the wealthy (who were causing the panic) an effort was made to rebalance the budget by cutting public expenditures drastically. This, by reducing purchasing power had injurious effects on business activity and increased unrest amount the masses of the people. Mutiny broke out in the British fleet in protest against pay cuts. … The outflow of gold could not be stopped. It amounted to 200 million pounds in two months. On September 18th New York and Paris refused further credits to the British Treasury, and three days later the gold standard was suspended. To many experts the most significant aspect of the event was not that Britain went off gold, but that she did so with the bank rate at 4 ½ percent. It had always been said that a 10 percent bank rate would pull gold out of the earth. By 1931, the authorities in Britain saw clearly the futility of trying to stay on gold by raising the bank rate. This indicates how conditions had changed. It was realized that the movement of gold was subject to factors which the authorities could not control more than it was under the influence of factors which the could control. It also shows – a hopeful sign – that the authorities after 12 years were beginning to realize that conditions had changed. For the first time, people began to realize that the two problems – domestic prosperity and stable exchanges – were quite separate problems and that the old orthodox practice of sacrificing the former to the latter must end. From this point on, one country after another began to seek domestic prosperity by managed prices and stable exchanges by exchange control. That is, the link between the two (the gold standard) was broken, and one problem was made into two.
The British suspension of gold was by necessity, not by choice. It was regarded as an evil, but it was really a blessing …
Because of the deflationary policy which accompanied the abandonment of gold in Great Britain, recovery from depression did not result except to a very slight degree. Neither prices nor employment rose until 1933, and, from that year on, the improvement was slow. The depreciation of sterling did result in an improvement in the foreign trade balance, exports rising very slightly and imports falling 12 percent in 1932 in comparison with 1931. This led to a revival of confidence in sterling and a simultaneous decline in confidence in the gold-standard currencies. Foreign funds began to flow to London.
The flow of capital into Britain in early 1932 resulted in an appreciation of sterling in respect to the gold currencies. This was unwelcome to the British government since it would destroy her newly acquired trade advantage. … The easy credit policies of Britain (designed to encourage business activity) had thus to be combined with deflationary prices (designed to prevent any powerful flight of capital). The bank rate was dropped to 2 percent by July 1932, and an embargo was placed on new foreign capital issues to keep this easy money at home.
On this basis, although sterling fell to 3.14 by the end of November 1932, a mild economic recovery was built up. Cheap credit permitted a shift of economic activity from the old lines (like coal, steel, textiles) to new lines (like chemicals, motors, electrical products). The tariff permitted a rapid growth of cartels and monopolies whose process of creation provided at least a temporary revival of economic activity. …The budget was balanced …
The improvement in Britain was not shared by the counties still on the gold standard. As a result of the competition of depreciated sterling, they found their balances of trade pushed toward the unfavorable side and their deflation in prices increased. Tariffs had to be raised, quotas and exchange controls set up.
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Damned interesting, no?
Regards,
Glenn |
